Modeling and managing total cost is an important best practice for procurement organizations expanding their services procurement efforts.

In the direct supply chain, cost management is religion. From modeling the total cost of individual parts or components – including raw materials, labor, value-added elements, etc. – to factoring in inventory carrying costs and general working capital, total cost is the direct procurement king. But in services procurement, we typically only build limited visibility into total cost both from the buyer and the provider (cost breakdown) perspective.

Yet modeling and managing total costs, including price/cost benchmarking, to ensure best-value relationships with services providers of all sorts – staffing firms, consultancies, etc. – is essential to build systematic visibility and control into services buying activities. Spend Matters research suggests that more advanced procurement organizations are starting to apply the same type of cost modeling and benchmarking from the manufacturing world to services.

But the challenge is that they are still doing so inconsistently across different service types (and even within categories, such as contingent labor) based on available information, internal capability and general know-how. Intermediaries such as managed services providers (MSPs) or even vendor management services (VMS) providers may be able to provide a partial picture into benchmark cost (e.g., bill rate/pay-rate benchmarks by job title on a regional basis), but this is only a first step to modeling and managing total costs against the universe of potential services spending approaches to achieve similar outcomes.